Index Fund Advisors
Founder & President
Mark Hebner is Founder and President of Index Fund Advisors, Inc. (IFA), author of the popular book, "Index Funds: The 12-Step Recovery Program for Active Investors", and is a respected speaker, news contributor and provider of authoritative information and education on investing.
"Index Funds" has received praise from financial industry and academic luminaries, including John Bogle, David Booth, Burton Malkiel, as well as Nobel Laureates Harry Markowitz and Paul Samuelson. It was nominated as one of the three all-time greatest investment books, along with the writings of John Bogle and Warren Buffett.
IFA avoids the futile, speculative, and unnecessary cost-generating activities of stock, time, manager, and style picking. Contrarily, IFA employs a disciplined, quantitative approach that emphasizes broad diversification and consistent exposure to the structural trends of global publicly-traded markets.
IFA is a true fiduciary financial advisory firm, compelled by law to act in the best interests of clients, always – something the investing public, mistakenly, believes all financial advisors are required to do.
Mark contends that one can be a passive investor but still apply active intelligence to the process of investing. He takes an evidence-based academic approach to this process and illustrates it with art and science.
Mark was a member of the Young Presidents' Organization for 19 years and is currently a member of the World Presidents' Organization and the Chief Executives Organization.
Prior to founding Index Fund Advisors in 1999, Mark was President, CEO and co-Founder of Syncor International (previously a public company - SCOR) from 1975 to 1985. In Jan. 2003, Cardinal Health acquired Syncor for approximately $850 million. As a division of Cardinal Health, it is the largest radiopharmaceutical network in the United States.
BS Nuclear Pharmacy, University of New Mexico
MBA, University of California at Irvine
Assets Under Management:
Nothing contained in this publication is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
This is a great question because essentially what you are asking is “how many managers have enough skill to beat the market after all fees and expenses?” Before we give you an answer it is essential that we are comparing apples to apples. So if we are asking how many managers outperform the S&P 500, which is a US large cap index, then we need to look at the performance of active managers who are trying to pick the winners in the US large cap asset class. We don’t want to look at small cap managers or foreign stock managers or bond managers because we would then be comparing apples to oranges.
All right, enough with the fruit. Based on the Standard & Poor’s Index Versus Active (SPIVA) scorecard as of June 30, 2015, 65.34% of large cap managers underperformed the S&P 500 for the 1-year period. Over the last 5-year period, 80.8% underperformed the S&P 500. Over the last 10-year period, 79.59% of active managers underperformed. These types of figures are very similar in other asset classes like small cap stocks and foreign stocks.
Rest assured, it is very, very difficult to do over long time horizons, which is why we tell our investors to buy and hold a globally diversified portfolio of index funds versus trying to pick the next best winner.
Congratulations on your upcoming retirement. The question you are really asking is, “how do I make $1 million last for the remainder of my life?” The reason why this is a better question to ask is because making $1 million last may involve moving outside of fixed income. While fixed income and safety sounds more appealing to a recent retiree, it may be overlooking other risks, such as inflation, that can have a detrimental effect on your overall wealth over time. A standard rule of thumb in the financial planning industry for annual withdrawals from your retirement savings is 4% (5% for globally diversified portfolios), which means that you can expect to withdraw about $40,000 to $50,000 adjusted for inflation every year from your portfolio without running out of money with a very high degree of confidence. You can add your expected social security payout or any other pension plan on top of this in order to get an idea of your overall standard of living in retirement.
In terms of investment options, the best course of action is to buy and hold a globally diversified portfolio of index funds that matches your overall capacity to take risk. You would own U.S. stocks, international stocks, emerging market stocks, real estate, and high quality short term bonds, all in an index fund strategy. For a new retiree, your overall risk capacity should be somewhat on the moderate to conservative side (more bonds than stocks). You should also look into working with a professional wealth advisor to help you make these decisions along with any other needs you have such as insurance planning, estate planning or tax planning. While it may sound appealing to just buy an immediate annuity or other guaranteed income product, there is a substantial cost in terms of removing risk from your portfolio. Working with an independent wealth advisor can help your formulate your overall goals, develop a comprehensive risk profile, and go over your options in terms of what is the best fit for your particular situation.
Your 401(k) is made up of two items. Contributions made by you, which are legally yours and should have access to at all times. Then there are (possibly) matching contributions made by your employer. If your 401(k) is a safe harbor plan, then you have legal ownership of those contributions as well and should have access at all times. If there was a vesting schedule associated with matching contributions, then you may only have partial ownership of those contributions.
Depending on the rules established for terminated employees in the 401(k), you may have a limited number of transactions per year, which may limit your ability to switch between different investments. You should have access to your contributions and any vested employer contributions. You can roll those contributions over into a Rollover IRA or a new employer’s 401(k) when you are eligible to participate.
You should call the provider back and ask them specifically why you do not have access to your money. There may be certain rules in place for recently terminated employees, an outstanding loan, etc.
“Alpha” refers to the excess performance of a fund after it has been adjusted for risk or “Beta.” Beta is typically characterized as “market risk.” We would measure the correlation between a particular manager’s fund and the overall stock market. For example, if the fund goes up by 20% when the market goes up by 15%, then we would say that the fund has a Beta of 1.33. Because the fund is more volatile than the overall market, we would expect the fund to outperform the overall market overtime. This might have nothing to do with skill by the fund manager, rather just the particular set of stocks the fund has exposure to. Once we control for Beta, then we can see how much “Alpha” the manager is able to generate above what we would expect to be compensated for in terms of market risk.
It is important to note, there have been advancements in the field of financial economics in terms of Beta. Multiple Betas have been discovered such as market capitalization (size), relative price (value), profitability, and momentum. We must control for all of these factors before we can attribute “alpha” to a particular fund manager.
R-squared measures how much the variability in returns for a particular fund is explained by the benchmark. In other words, it measures how well the benchmark tracks the overall performance of the fund. We would typically want to see something above 0.95, which means that the benchmark tracks the fund over 95% of the time. This is important because we want to make sure we are properly benchmarking a particular fund. If there is a substantial mismatch between the benchmark and the fund, then we may be making false conclusions about metrics such as “alpha.” A practical example would be to compare a manager who focuses on International Growth Stocks to the S&P 500. Two completely different samples and therefore it is not a proper benchmark.
First, risk and return go hand in hand. There is no such thing as a free lunch. For someone who is 26 years old, it is imperative for you take a healthy amount of risk (at least 70% in stocks). The best way to gain exposure to both the stock and bond markets is to hold a globally diversified portfolio of index funds. Forget trying to day-trade, pick winning stocks, time markets, or invest money with hot mutual fund mangers. All of these strategies have led to more destruction of wealth versus a low-cost index alternative. There are times when markets are going to be very turbulent, but you need to stay in it through thick and thin. Time is on your side.
Stay away from buying individual bonds. Transaction costs are too expensive for the amount of money you are looking to invest. Buy a low-cost bond fund instead.
Ideally, you should have 6-12 months of living expenses set aside for a rainy day, with the rest of your assets invested based on your longer term goals. This can include retirement, college planning, purchasing a home, starting a business, etc. Your 401(k) should be heavily invested in equities since you have 35-40 years before you will touch those assets. Shorter term goals should be invested very conservatively using money market funds, short term bond index funds, and maybe a little bit of stock index funds.